When Cramer was in law school, he saw the beginning of the indexing of individual stocks. He saw the bundling first of the stocks followed by the Value Line Company, an influential firm at the time, and then ultimately the S&P 500. However, Cramer was more interested in individual stocks.
In 1984, when Cramer started at Goldman Sachs, he used to get a call from his mother, who loved the stock market and would call for quotes on her favorite stocks. And with all of the fancy research available at that time, she chose to invest by buying what she knew and staying on top of it.
She liked to shop at Giant Food, a progressive supermarket chain at the time, so she bought the stock. The process of homework back then was to like an idea through personal experience, read up on it with the best research and match those insights with other firms. Cramer also learned during that time that sometimes Wall Street research can be very wrong, so a healthy dose of skepticism is a good thing.
"I want to show you that it isn't reckless to try to pick individual stocks and those who say it is just don't understand the process of first-hand experience, married with research and buttressed by skepticism. It all increases the odds of successful individual stock investing while minimizing the risks of single stock ownership," Cramer said.
And when Cramer decided to leave Goldman Sachs after four years and open his own hedge fund, the first stock that he bought was Heinz. Why? Because he liked to own a stock that represented a call on great management that could deliver earnings through thick and thin.
He did not count on the performance demands of a manager. He quickly learned that just buying a stock because it was terrific didn't matter to the fund, and those long-term investments did not produce daily performance.
"Heinz was a staple with a good dividend and what I didn't understand at the time was when the economy heats up people dump these kinds of stocks for something more cyclical," Cramer said.
Cramer didn't get that if he wanted to perform daily, he would have to take daily action. You can't just sit there and take a beating because you own best-of-breed companies.
But here was the problem — this rotation game is not one that investors can play at home without being a full-time professional. And eventually when the market got too hot, it crashed and all of the cyclical plays were decimated.
But guess what? Heinz snapped right back. That is what happens to best-of-breed well-managed companies.
"As a home gamer, you can use the flailings of the hedge-fund performers to your own advantage by picking up best-of-breed companies," Cramer said.